Tesla's Inclusion In The S&P 500 Could Support Higher Prices: 'Massive Moment For The Company'

Tesla Inc TSLA is scheduled to report its second-quarter results after the market close Wednesday.

The Street on average expects an adjusted loss per share of 11 cents and a net loss of $240 million. 

Since the company did report a record number of car deliveries in July, speculation is mounting that Tesla will sustain a full year of reported profitability, making it eligible to join the S&P 500 stock index.

What Happened: Tesla’s production dropped nearly 20% as it operated in a pandemic environment, while vehicle deliveries rose 2.5% on a quarterly basis. The company’s resilience to the event prompted a threefold increase in its stock price. 

Recent optimism surrounding the company’s eligibility for inclusion in the S&P 500 has offered support to higher prices.

“The excitement among investors is understandable,” said Peter Hillerberg, co-founder of ORTEX Analytics.

“Our analysis suggests that there is just under $3 trillion in transparent mutual funds and ETFs that directly track the composition of the S&P 500. In addition, there is also at least a further $5 trillion of assets in funds which benchmark against the index."

New S&P 500 additions tend to lead to activity as fund managers decide whether to remain underweight or overweight, Hillerberg said. 

Why It Matters: Tesla’s inclusion in the S&P 500 would be a bullish sign, making eligible a huge chunk of capital to invest in the company’s stock.

“If we were to take Tesla’s closing price on Thursday, July 17, 2020, as an example, the company would make up 0.81% of the S&P 500,” he said. “Assuming this leads to investors allocating 0.81% of the $5 trillion of assets benchmarked against the index, this would equate to around $40 billion of buy orders.”

Despite entry into the index being bullish on its face, Hillerberg said that speculative buying surrounding the event would far outweigh the news itself.

“Tesla is now the largest auto company in the world and by free-float would enter the S&P 500 in 18th place, wedged between Netflix and Berkshire Hathaway,” Hillerberg said.

“When this happens, it will no doubt be a massive moment for the company and its investors. However, both may have to show patience over the coming months and wait a little longer before they have the green light to supercharge the index.”

Photo from Pixabay.